It seems as though businesses have specialized teams whose only job is to come up with new and more outrageous fees to charge us.
Of all the many fees you pay, which is the worst? Which one has the most potential to take you to financial ruin?
Of all those bank fees, convenience fees and other random charges we pay, the worst by far are the fees attached to 401(k) plans and other retirement accounts.
Federal regulations require 401(k) plan administrators to disclose fee information to employees. However, many workers still do not understand and often overlook 401(k) fees.
What’s more, the fees seem deceptively small even though they can add up to hundreds of thousands of lost dollars.
Consider this example from the U.S. Department of Labor: Say you have a 401(k) with a current balance of $25,000. Over the next 35 years, you earn an average return of 7% on that balance.
Even if you didn’t contribute another penny during those 35 years, here’s how much money you would have if account fees were 0.5%, compared with how much money you’d have if your fees were 1.5%:
|Beginning balance||Annual return||Fees||Balance in 35 years|
So the higher fee cost you an additional $64,000 over 35 years — even though the fee was only 1% higher. That’s $64,000 less to live on in your golden years.
And that’s if your 401(k) had only $25,000 in it. Imagine how much money you would stand to lose in fees if you were more diligent about saving for retirement.
Want to find out how badly you’re personally being dinged by fees? Click here for a calculator from the Pew Charitable Trusts that will show you.
What you don’t know can cost you
It may be news to you that you’re paying 401(k) fees. That’s part of the problem. Although 401(k) plan administrators are required to disclose fees, some employees mistakenly believe that they don’t pay any expenses or fees for their plan.
There can be dozens of fees attached to a 401(k). They typically fall into one of three categories:
- Plan administration fees: These are fees associated with the cost of providing and maintaining your 401(k). They may be included in the investment fees or charged separately.
- Investment fees: These are fees you pay to have your money managed in an investment fund. These fees are listed on disclosure statements as a percentage that is often called an “expense ratio.”
- Individual service fees: These are fees attached to optional features offered by a 401(k) plan, such as fees for getting a 401(k) loan.
While these fees can cost you thousands of dollars each year, you might never know it because you don’t pay them directly. Instead, they are pulled out of your 401(k) automatically.
Without the pain of having to write a check to the investment firm for managing your account, it’s easy to miss the fact that fees can be a drain on your retirement savings.
How to lower your 401(k) fees
To stop the bleeding, you first need to assess the damage. Your 401(k) is required to provide an annual statement showing — among other things — the fees included in the plan. Pull it out and take a look at what you’re paying.
Last year, David Blanchett, head of retirement research for Morningstar’s Investment Management group, told CNBC that average total plan fees are about 0.37% for the largest plans, and a whopping 1.42% for the smallest plans.
Try these ways to limit your fees:
- Invest in index funds: Actively managed mutual funds have higher fees than passively managed funds, aka index funds. Active funds also usually lag behind index funds in terms of performance. So invest your money in funds tied to stock indexes, such as the Standard & Poor’s 500 Index, to reduce your costs and maybe even increase your returns.
- Leave your money alone: In some cases, you might pay a fee if you sell one fund and purchase another. Pretend your 401(k) is a rotisserie chicken: Set it and forget it. Well, you don’t want to forget it completely, but you shouldn’t be switching funds every time the market hiccups either.
- Talk to your employer: If you look through your plan disclosures and aren’t impressed with what you see, let your employer know. Ask if the employer would consider changes that may open up new fund options. Gather a few of your co-workers to approach the human resources department together in order to make a stronger case for your proposal.
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